Dollar falls vs. euro, gains against yen

GDP falls short of forecast but inflation component jumps

By

RachelKoning

CHICAGO (CBS.MW) - The dollar tumbled against the euro and Swiss franc Thursday when a report on U.S. economic growth failed to meet expectations.

The much-anticipated gross domestic product report, which showed a 4.2 percent gain in the first three months of the year, drew a mixed response across financial markets. While the result fell shy of expectations for 5 to 6 percent growth, its inflation component jumped, keeping alive the chance for a Federal Reserve rate hike in coming months, said some analysts.

Higher rates would presumably boost demand from foreigners for U.S. assets and the dollar, cutting demand for other currencies.

But "no one was committed" to a stronger dollar at these levels, without more convincing evidence for a rate hike, said Craig Russell, senior foreign exchange dealer with Alaron in Chicago.

The dollar skidded 1.2 percent vs. the euro, with the shared currency quoted at $1.1979 in late U.S. trading. The greenback fell 1.1 percent vs. the Swiss franc at 1.2900 francs per dollar.

The greenback has traded in both directions against its Japanese counterpart, but remains near the six-month yen highs hit earlier in the session when concerns about slower growth in China depressed a range of Asian currencies. The dollar was quoted at 109.85, down 0.2 percent vs. late U.S. levels on Wednesday. The dollar briefly crossed above 111 yen earlier Thursday.

The dollar was higher against its major rivals ahead of the U.S. data, but eventually reversed course.

Russell said the euro-dollar move was accelerated as buy orders were triggered after the initial move higher for the euro.

The rally did stop around the $1.1980 area, a level of key resistance, he said.

U.S. rates stand at 1 percent to the eurozone's 2 percent, but the currency market continues to weigh the chance for a rate cut from the European Central Bank and the likelihood of a rate hike in the U.S.

The Fed meets next Tuesday and may hint at a future rate hike in its policy statement. The ECB meets Thursday, and a minority of analysts thinks the bank is ready to cut rates now, while more are convinced a rate cut could come later in the year if Europe continues to trail U.S. and Japanese growth.

ECB President Jean-Claude Trichet told Dutch television that eurozone price stability remains balanced, remarks some in the forex market took as a sign the bank wasn't likely to cut rates.

The currency market paid little attention to other U.S. economic reports Thursday.

The average number of new claims for state unemployment benefits over the past four weeks fell by 1,250 to 346,500, the Labor Department said Thursday. Initial claims in the week ending April 24 fell by 18,000 to 338,000, the department said. See Economic Report.

The cost of employing a U.S. worker increased 1.1 percent in the first three months of the year. Economists were expecting a 0.9 percent gain in employment costs, according to a survey conducted by CBS MarketWatch. See Economic Report.

Eyeing China

Tokyo markets were closed for a national holiday, the first of the Golden Week string of holidays. Markets will open Friday, and close again May 3-May 5.

"The dollar appears resilient to growing fears of China slowdown," which weighed on the yen, said Desmond Supple, head of research at Barclays Capital in Singapore.

Media reports that China had asked banks to halt lending for the next few days raised worries that the booming Chinese economy is heading for a hard rather than soft landing. See full story. China is an important export market for Japanese goods.

But the main factor supporting dollar-yen Thursday was the absence of Japanese exporters, who sell the U.S. unit to repatriate profits, said Supple.

In South Korea, the won posted its sharpest drop in two months after Finance Minister Lee Hun Jai called the currency "overvalued" in an interview, according to Bloomberg.

The New Zealand Reserve Bank raised its official cash rate for the second time this year Thursday, in a move aimed at curbing domestic inflation.

The central bank hiked the rate by 0.25 percentage point to 5.5 percent, following a similar move in January.

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